Restaurants

Krispy Kreme Wants to Be Good for You

Over the past 75 years, Krispy Kreme Doughnuts (KKD) won a fanatical following with one product: sinfully sugary doughnuts, served warm. "Nothing better than the classic glazed doughnuts," says Rodney Blake, a Philadelphia banker who rarely passes a Krispy Kreme shop without stocking up. "There are other places to go if you want healthy food."

That's about to change. Chief Executive Officer James Morgan plans to add oatmeal, yogurt, and fruit juice to the Krispy Kreme menu. The very prospect would have been laughable in the late 1990s when the chain's "Original Glazed" doughnut became a national obsession—before falling victim to overexpansion and the carb-free Atkins diet.

The new menu is part of a revival at Krispy Kreme. Its stock has more than doubled in the past year, to $9 per share. Last month the chain posted its best quarterly profit since 2004: $9.17 million on sales of $104.6 million for the first quarter ended May 1, more than double that of the year before. To keep the momentum, Morgan says he needs to sell healthier food and specialty coffee. "We weren't getting a lot of verbal complaints," he says. "But we also were not getting the sales we thought we should."

Krispy Kreme was founded in 1937, when Vernon Rudolph bought a yeast-raised doughnut recipe from a New Orleans chef and opened a factory in Winston-Salem, N.C. In the 1980s the company began opening stores across the U.S., and by the late '90s the Krispy Kreme doughnut had become a cultural icon complete with its own featured role in a 2002 episode of Sex and the City. Before long, however, Krispy Kreme's pell-mell expansion caught up with it, and by 2005 the company's board sent its CEO and several executives packing amid an accounting scandal. The stock tanked, the company was forced to close half its 390 stores, and 14 quarters of losses followed.

In early 2008, Morgan, a former securities executive who had been a director since 2000, took over and began revamping the chain. One of his first acts was to drop the so-called factory stores, 7,000-square-foot spaces where customers could watch hot doughnuts bounce along conveyor belts. The showcase stores were a mistake because their locations required people to drive as much as 20 miles to buy a doughnut, says Sam Yake, an analyst at BGB Securities. The new stores, dubbed neighborhood shops, are less than half that size and located in highly trafficked shopping centers and college campuses; some even have drive-throughs.

Morgan has also ramped up overseas expansion. He's doubled the store count abroad to more than 400—compared with 230 in the U.S.—and recently said Krispy Kreme is looking for partnerships in Latin America. Last year international revenue grew 15 percent, to $18.3 million.

Still, if Krispy Kreme is to have any hope of prospering against the likes of Dunkin' Brands and Starbucks (SBUX), which have 6,800 and 10,900 U.S. locations, respectively, it must generate more sales. Besides adding healthier fare, Morgan is placing a big bet on coffee, which is more profitable than doughnuts. In September, Krispy Kreme will roll out a range of coffee drinks, beginning with signature blends and moving to espressos and lattes over the next 18 months. Nancy Childs, a food marketing professor at Saint Joseph's University in Philadelphia, says Morgan would do well to target people in their 20s and 30s. "Starbucks isn't really their brand," she says. "Krispy Kreme has room to step up."

The brand still connects with many consumers. The Krispy Kreme page on Facebook has more than twice as many fans as Tim Hortons (THI) and nearly as many as Dunkin' Donuts. So Morgan is careful not to stray too far from the company's roots. Despite its shift to healthier fare the chain still lends its name to the annual Krispy Kreme Challenge in Raleigh, N.C., where contestants run two miles, down a dozen doughnuts, then run two more. Who needs oatmeal?

The bottom line: Krispy Kreme is trying for a health-fueled comeback. It now has 400 stores overseas, almost two-thirds of its total.